The EU has introduced new cross-border transaction reporting requirements.
Recently in May, the EU quietly adopted Council Directive 2018/822/EU on the reporting of “potentially aggressive” cross-border tax-planning arrangements.
Reporting requirements will kick-in on August 31st, 2020, after the Council Directive is implemented by EU Member States.
What is important is that the Council Directive is simply an instruction to Member States to create new national laws according to the principles of the directive; the directive itself is not itself a law. Thus, states can create varriance in their cross-border reporting regimes, provided they fall within the directive’s scope.
Noteably, reportable arrangements are those entered into on, or after June 25th, 2018 – hence, one must plan for reporting now.
The Council Directive is similiar to US reportable transaction requirements in force since 2004. The goal in both cases is to significantly reduce tax shelter transactions.
What is a cross-border tax-planning arrangement?
Simply put: it is any transaction (or series) that includes a qualifiy cross-border element. The threshold is met if not all parties to the transaction are tax resident in the same jurisdiction.
Even if all parties are tax resident in the same country, the threshold may be met if a party has a permanent establishment outside of the venue, a dual tax residency, or even a mere activity by said party outside the transaction venue.
What makes the arrangement then reportable?
Telltale signes that are utilised in Central and Eastern Europe will now include: (i) remuneration to advisers based on the tax saving of an arrangement; (ii) requalification of income into lower-taxed types of proceeds; (iii) payments to participants in no-tax-environments or almost-no-tax environments, valuation mismatches; (iv) arrangements designed to undermine the reporting of financial account information or non-transparent ownership structures; and (v) agressive transfer pricing.
Some of these threshold tests may only taint the arrangement, whereas others will unconditionally taint the arrangement, regardless of purpose.
Who is required to report?
The Council Directive states that intermediatires of the arrangement are required to report, provided they have a EU Member State nexus. Participants themseleves have no such obligation.
Intermediaries will most likely be banks, brokers, other market-makers and advisors of all sorts.
Advisors may obtain excemption based on “professional privilege”. Nevertheless, they will be liable for notifying other intermediaries or the client of their reporting obligations. If there is more than one intermediary involved, all intermediaries shall be liable for reporting. If no intermediary qualifies for reporting, the reporting obligation will reside on the participants in the arrangement itself.
What is reportable content?
Minimum reporting requirements will include: (i) identification of intermediaries and relevant taxpayers, including their name etc.; (ii) elements that make the arrangement reportable; (iii) relevant “content” of the arrangement; (iv) the date of implementation; (v) national provisions supporting the tax effects of the arrangements; (vi) value; (vii) the EU Member States where the arrangement shall take place; and (viii) other persons “affected by the arrangement,” including the EU Member States to which such persons are linked.
What are the consequences of non-reporting?
EU Member States will implement their own effective, proportionate and dissuasive penalties for infringements.
These new repoting obligations will mean more onerous compliance requirements on any transaction in Central and Eastern Europe that is cross-border in nature – either inherently due to its participants or associated holding structures.
Notwithstanding market concerns and objections, individual EU Member States’ governments have already expressed an interest and willingness to implement the Council Directive into their respective national laws.
Henceforth, participants and intermediaries of cross-border arrangements will need to review envisaged transactions in terms of reporting requirments, and the collection of all necessary data is now required in order to comply with the August 31st, 2020 reporting deadline.
As such, one should expect that underlying contractual documentation of reportable or potentially reportable transactions to be modified in order to ensure proper cooperation amongst all participants and intermediaries to provide data which the intermediary needs to report.